The impending oil plate bankruptcies underscore the fragility of the boom-to-bust industry even before the coronavirus crisis.
“These companies were in trouble before COVID-19 happened,” John Kempf, senior director of Fitch Ratings, told CNN Business. “After 2015 and 2016, they never really rebuilt their balance sheets. When the stress came, they were not prepared for it.”
There is so much crude that the world lacks space to store everything. This conundrum brought crude oil far below zero last week, marking the first case of negative oil prices since the launch of futures in 1983.
$ 43 billion in default of junk energy bonds
Prices are so low that Rystad Energy has warned that hundreds of U.S. oil exploration and production companies could file for bankruptcy by the end of 2021.
Fitch Ratings warns that more than $ 43 billion in high-yield bonds and leveraged loans in the energy sector will default in 2020. For the context, that is almost five times the average level of sector default in the past twelve years.
Moody’s Investors Service has revised its short-term oil price assumptions down this week, predicting that US oil prices will now average $ 30 per barrel in 2020, too low for almost anyone which American oil shale company can make a profit. Moody’s sees American crude climb to just $ 40 in 2021.
“Financial risk is increasing and is expected to remain very high for all but the highest rated oil and gas issuers,” writes Moody’s in the report.
Chesapeake Energy in danger
The energy sector dominates Fitch’s list of most troubling debts, accounting for 60% of the list.
No one wants to lend to a shale oil company that cannot generate free cash flow at cheap prices. It is therefore difficult for the fracturers to roll over the existing debt before its maturity.
“There is no access to the financial markets to refinance. Lenders are reluctant to give money to this industry,” said Kempf, director of Fitch.
In addition, investors are tired since the energy sector has been struggling for years. The S&P 500 energy sector has been the worst performer – by far – in the past decade.
“The portfolio managers are tired of the volatility in oil and gas prices. They no longer want to be in the industry,” said Kempf.
Washington to the rescue?
“We will never give up on the big American oil and gas industry,” said the president.
Treasury Secretary Steven Mnuchin said last weekend that the Trump administration was considering providing a “loan facility” to the energy sector.
Analysts said oil companies with high-quality credit ratings will likely have access to these emergency funds.
“We can only make loans to creditworthy entities with the expectation that these loans will be repaid,” Federal Reserve Chairman Jerome Powell said on Thursday while speaking about the lending capabilities of the central bank.
But it is not clear whether the undesirable shale oil companies will have access to the funds they need to survive because of their precarious financial conditions.
“I don’t count on that to protect myself from defaults,” said Kempf of Fitch. “Many of these companies could not access the financial markets before COVID.”